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While Bernanke May Not Understand Gold, It Seems Gold Certainly Understands Bernanke

Tyler Durden's picture




 

"We see upside surprise risks on gold and silver in the years ahead," is how UBS commodity strategy team begins a deep dive into a multi-factor valuation perspective of the precious metals. The key to their expectation, intriguingly, that new regulation will put substantial pressure on banks to deleverage – raising the onus on the Fed to reflate much harder in 2014 than markets are pricing in. In this view UBS commodity team is also more cautious on US macro...

 

Via UBS,

In testimony in front of the Senate banking committee in July, Ben Bernanke made an unusual comment; 'nobody really understands gold prices and I don’t pretend to understand them either'. That's a surprising admission, because, as head of the central bank that controls the word's reserve currency, we think Bernanke should understand gold. Because gold, in our view, is a critical barometer of the state of global credit.

Many clients have asked us whether gold is an inflation hedge. The chart below suggests not.

But we believe that gold is in fact an inflation hedge - but the inflation it is hedging is not inflation as most people commonly understand it.

Friedrich Hayek said that inflation is not a change in the consumer price index, it is an increase in money and credit. To this he added near money - any asset that could be quickly and easily swapped for traditional money or credit. (For ease of writing - I'll refer to money, near money and credit combined as 'credit'). For Hayek, neutral inflation was when credit expanded in line with the productive potential of the economy.

Whether Hayek's inflation leads to traditional CPI inflation depends on the nature of the economy. If it is sclerotic - bound up by unions, capital controls and excessive state spending as it was in the 1970s - then you get CPI inflation. In a globalised world characterised by industrial overcapacity in China, a large global under-utilised workforce, and exceptionally low rates, the impact is asset price inflation.

Hayek had a lot to say about an environment where 'inflation' or credit expanded too fast and asset prices rose. He argued that it accelerated growth, because there was a large incentive for companies that service or build assets (from estate agents and investment banks, to property developers) to expand, to build, and to transact more asset sales.

Hayek's problem; this causes a major misallocation of capital - because the returns from servicing and building assets are available only when credit is expanding.

When credit stops accelerating (not even declining) asset prices start to fall.

Returns in these areas decline precipitously, and value is destroyed. When credit grows in line with the productive potential of the economy, a very different incentive structure emerges. Assets as a group tend to rise in line with incomes. So the incentive is to boost income and wealth through building businesses that create sustainable returns above the cost of capital.

So how does gold fit into this? In commodity strategy, we see gold as a barometer of global credit inflation. The best way to understand this is to highlight the Bretton Woods II system of global capital flows that drove gold through a 12 year bull market up to 2011.

We highlighted this mechanism in the note 'Reverse Bretton Woods' (3 September 2013) and depicted in Figure 3 below. It starts in the central oval with the Fed running easy money, and with the commercial banks expanding their balance sheets. In the 2000s and under QE1 and QE2, a key feature of this was the use of repo and the purchase of credit with CDS insurance. This balance sheet expansion neatly avoided raising risk weighted capital ratios - which allowed the banks to progress towards their Basle III targets. (More on the regulator backlash later).

This immediately suggests the first two things to track to measure the expansion of global money and credit - measure the change in the size of the Fed's balance sheet and the change in banks domestic lending. Those two neatly add up to M2 - notes and coins in circulation and deposits with commercial banks.

But that misses out 'near money' - assets that can be swapped for cash and used to buy more assets.

The Treasury borrowing advisory committee have estimated this - at US$43trn at the start of the year. But the data is very slow coming out. One way to proxy developments is to follow the amount of liquid assets that the US banks hold that can be used for collateral in repo transactions. That's shown in the chart below.

That's not perfect, as it doesn't take account of rehypothecation - the reuse of capital (which is like the velocity of money in the repo market). We are not aware how we track this in a timely manner - but any suggestions, please get in touch. What we do know is that new regulations - notably central clearing rules, are sharply reducing the reuse of collateral for repo and other trades.

But then there is the global aspect - the right side oval in figure 3 shows that when capital flows into emerging markets, central banks print their own currency to buy the incoming dollars. This sets off a chain reaction of credit growth - first deposits rise, then banks lend to consumers and corporates. That raises growth and inflation, lowering real rates and inducing more savings into the system (from consumers who need to save more to build a nest egg) and more demand for loans from corporates, and consumers who want to gear up speculate on property or fixed capital formation. Which causes even more credit expansion.

So the initial capital flows into the rest of the world are multiplied up first by the emerging market central banks, and then by the commercial banks, and by the incentives that a combination of strong liquidity growth, rising inflation and sticky nominal rates then induce.

Again, the data on this is slow and partial (as a chunk of emerging market lending occurs off balance sheet). So, out of expediency we take the change in foreign central bank treasury holdings held at the Fed, as a timely proxy, and we multiply it up five times - as a proxy of the impact of the fractional and shadow banking multiplier in emerging markets.

This gives us four metrics.

Of these - we believe that a necessary condition for gold to rally is the expectation that 1) capital will flow into emerging markets, 2) the combination of the fed's balance sheet and the banks marketable securities holdings rises.

The banks' vanilla lending at home in the US has little positive impact, and probably a negative impact on gold prices. Why? Because it doesn't deliver capital lows overseas, and it induces expectations of tightening monetary policy from the Fed.

So we have created a weighted indicator made up of foreign central bank treasury holdings with the Fed, Fed balance sheet expansion and the US banks liquid security holdings.

It is potentially more revealing to show the change in liquidity vs the gold price.

In commodity strategy, our view is that US combined central bank and commercial bank asset purchases are the key driver of yield compression - which makes gold a relatively more attractive asset to hold - and the global reach for yield, that induces flows into emerging markets. Those flows then start a very bullish gold dynamic;

  • The falling dollar raises dollar denominated gold prices. Rising FX reserves induce central banks to buy gold to maintain the gold ratio in reserves.
  • The liquidity boost in emerging markets raises income among consumers who tend to invest in gold. Rising commodity prices and commodity currencies raise dollar based gold costs, and reduce revenues in local currency terms – constraining supply.

But when the Fed started QE3 last October, the improving growth outlook and rising stock market had gold anticipating the threat of tapering (first mentioned by the Fed three months later on Jan 4th), anticipating capital outflows from emerging markets (which began in Jan/February and which accelerated in May). And anticipating commercial bank liquid asset sales - which also began in May. All considered negative for gold.

So while Bernanke may not understand gold, it would appear that gold certainly understands Bernanke.

Perhaps the most significant aspect of the tapering debate was that the Fed became increasingly hawkish on tapering in 1H13, despite the fact that growth was modest and inflation subdued. Our interpretation of this was that the Fed started to become highly concerned about credit market overheating.

Governer Jeremy Stein raised the issue in the December 2012 meeting, and his speech in February 2013 outlined research that showed not just tight spreads, but outsized low quality credit issuance - the classic signals of an overheated credit market, with the clear rider that this could lead to a bust. Soon after Stein presented his results, the tone from Bernanke et al became much more hawkish on QE.

The most revealing aspect of the market reaction to Bernanke in 2013 is that it was the diametric opposite to the market reaction to Greenspan in 2004, even though their communication appeared identical. Back in February 2004, Greenspan stated that, if growth continued along the lines the Fed anticipated, then it would start to remove accommodation gradually. Greenspan then started raising rates by 25bps a meeting from June. Capital flowed into emerging markets, banks bought liquid assets, and the Bretton woods 2 system of flows kicked in so powerfully that treasury yields actually fell while rates rose. Something Greenspan dubbed 'a conundrum'.

Then Bernanke repeated the same communication procedure in 2013, announcing in June that, providing growth met the Fed's expectations, it would, in due course, gradually remove accommodation. The market response; capital flowed out of emerging markets, banks sold their liquid assets, treasury yields blew out 100 points and mortgage yields blew out more.

In our view in commodity strategy, that is a clear expression of the fact that the global liquidity dynamic of the 2000s, and under QE1 & QE2 is now set to run in reverse.

It is worth noting that Fig 12 shows that foreign treasury holdings have bounced since the Fed announced a delay to its tapering programme in September. EM currencies & equities have also jumped. We expect these trends to reverse as bank deleveraging takes hold, and as bullish positioning in broader risk assets unwinds. Asset price developments indicate that the pool of available liquidity has narrowed dramatically. The majority of major asset classes are well off their tops. None are confirming the near high in the S&P.

Within the US market, banks have started to underperform.

And a narrowing group of stocks is driving the market - led by a group of growth/concept companies on largely triple digit multiples - Tesla, Netflix, Netsuite, 3D systems corp etc.. We have created a basket of these names in the chart below. We are using this index as an indicator for when a decline in liquidity reduces investors’ appetites for highly valued issues.

We've highlighted that regulation will now likely drive a new wave of deleveraging by the banks.

What we're worried about is the interaction of several simultaneous strands of legislation - all acting to reduce liquidity – on the amount of money or near money available to buy assets. And the ease with which financial players can trade those assets.

Before we go into the details, one of the main questions we get asked is why would the regulators continue with a process that seems to cause market dislocation?

In our view it is because they believe in the morality of their actions - that banks that are too big to fail should shed assets or raise equity to the point where it's much harder for them to fail, to prevent a repeat of the financial crisis and the heavy burden on taxpayers that ensued. Fed Governor Jeremy Stein’s speech last week (‘Lean or clean?), and Governor Tarullo’s speech from May (Evaluating Progress in Regulatory Reforms to Promote Financial Stability) highlight that desire.

That, in our view in commodity strategy, is a laudable aim. The difficulty, as the old joke has it, is that to get there, you don't want to start from here.

Second, to many regulators, the banks have raised their exposure levels, and raised counterparty risk in the system, in order to raise net interest margin and equity value. So while the systemic banks reduced risk weighted assets by a third from the financial crisis, total leverage has risen 10%. This is precisely the opposite of what the regulators intended when they negotiated the Basle III capital requirements with the banks. The regulators apparently believe that the banks acted in bad faith. The regulators are now fighting back. The clearest comments on this were from Thomas Hoenig, deputy Chairman of FDIC, the US regulator.

Third, the regulators believe that the fact that the markets have rallied for five years gives them scope to act without causing too much damage.

And finally, regulators don't follow an Austrian view of the world. They may not perceive the degree to which credit markets have become overheated. And they are unlikely to recognise that the credit boom of the past five years has induced a massive misallocation of capital globally, and has created the potential for Hayek's 'recessionary symptoms' to show up as liquidity is drained from the system.

So what are the key regulatory actions?

  • Central clearing house trading to replace OTC - the key issue is that this raises collateral requirements, making the trades more expensive, and it makes it impossible to rehypothecate the collateral - which reduces system liquidity. The Treasury Borrowing Advisory Committee estimated that there was around us$4.5trn of rehypothecated in the US assets at the start of 2013.
  • US requirements for foreign owned banks to hold separate ring-fenced collateral to their parents. Oliver Wyman, the consultants, estimate that this will force foreign owned banks to reduce repo by US$300bn in the US.
  • Leverage ratios which do not allow the netting of repo, or credit against CDS - proposed at a minimum of 3% by the BIS, the US Comptroller of the currency has proposed 5-6%. European and UK regulators yet to decide
  • Capital requirements behind trading - including market risk capital changes, stressed value at risk, and incremental risk charges. Stephane Deo, UBS head of asset allocation, believes that these will reduce liquidity and raise volatility across several asset classes
  • Multiple additional measures under Dodd-Frank, etc

The problems with the regulation are fourfold.

  1. First, they make it much more expensive for banks to hold assets and carry out repo, or buy credit with a CDs insurance wrapper
  2. They tie up collateral, reducing the velocity of collateral.
  3. They make it less attractive for banks to originate credit, and to offer securities inventory holding/trade facilitation.
  4. They reduce liquidity and raise volatility across multiple asset classes.

And the problem with repo is that it is highly pro-cyclical. Rising values for high quality collateral used in repo reduce the amount of collateral you need to post to secure funding, and allow you to buy more assets. It can also reduce the haircuts for some lower quality collateral.

And a point Jeremy Stein highlighted in his speech on 'credit overheating' was that the more the cost of capital falls as a result of banks expanding their repo operations, the more financial institutions are induced to reach for yield - further accelerating the Bretton Woods II liquidity cycle.

But falling collateral values do the opposite. They reduce the capacity of firms to carry out repo and use the funds for credit transactions and for funding credit warehousing etc. and it reduces the tendency of financial companies to reach for yield. All this, in our view in commodity strategy, causes Bretton Woods II to go in reverse.

A key observation of the Bretton Woods II process of capital flows is that the risk free rate – the yield on 10-year treasuries – is no longer risk free. It is subject to a pro-cyclical and speculative expansion of leverage on the upside. The implication is that, when risk aversion rises, the normal safe haven bid for treasuries may be offset by selling from domestic commercial banks and foreign central banks. So yields may rise, or not fall as much as would be typical. This removes a natural stabilisation mechanism in markets. The higher cost of capital (than usual) may make the impact of risk aversion on markets and macro more severe than we are used to.

And just as the Bretton Woods process was highly reflationary and bullish for all assets, reverse Bretton Woods is considered bearish for everything, except gold and silver. And that's because of the capital misallocation generated during the credit inflation will unwind, destroying value and precipitating what Hayek called 'recessionary symptoms'. Hayek said all it took to start the unwind was a deceleration in credit expansion. Our description of the impact of QE on growth is shown in the following two charts

A rising cost of capital and shrinking liquidity, for any given rate of growth, does not only de-rate asset prices. It hurts growth in all the asset related businesses from financial services through to construction. And then it hurts growth via the reduced supply and higher cost of credit - which included from 2009-13 consumer spending (via mortgage refinancing, or cheap and plentiful car loans), or small companies (via tighter high yield spreads).

So far, this set up appears very similar to 1937. Back then the US was into a fourth year of recovery from the depression. The Roosevelt administration scaled back deficit spending and the Fed raised reserve requirements (not thought of as a problem at the time, due to bank’s excess reserves) and started sterilising gold inflows. Manufacturing declined 37% & the Dow halved. The difference, though, is that this time the Fed is likely to move earlier.

In our view in commodity strategy, as the private sector takes away leverage and reduces liquid asset holdings, the Fed will be forced into providing the heavy lifting to keep total asset purchases up. On that basis, the Fed will be doing much more QE in 2014 than the market anticipates.

And with gold and silver acting as a barometer of whether the Fed will be reflationary or deflating the global economy in 6-12 months time, we anticipate hem to rally as soon as the deflationary process becomes visible in a breakdown in the S&P or a breakdown in US macro surprises.

And in particular, with Yellen now all but certain to take Chair, the market will immediately assume that the Fed will reflate in response to any deterioration in broader markets or macro conditions. Something that we believe would be much more debatable had Summers taken the post.

 

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Thu, 10/24/2013 - 19:17 | 4088398 Teddy Tenpole
Teddy Tenpole's picture

 

 

Catchy title dude but a bit on the planet stupid head side.  Bernanke totally understands gold, believe me.

I'll let you doomer types in on THE key chart, punch up gold vs oil ;)

Thu, 10/24/2013 - 19:22 | 4088409 Pinto Currency
Pinto Currency's picture

 

 

"upside surprise risks"?

Like NFLX, TSLA, GOOG, AMZN?

 

Thu, 10/24/2013 - 19:31 | 4088445 TeamDepends
TeamDepends's picture

Surprise = Sell your metals to us now fraidy cat!

Thu, 10/24/2013 - 19:40 | 4088469 GVB
GVB's picture

The FED is reaching 'peak credibility'. Their done. Finito. The ECB sounds MUCH more credible, BUT THE SHEEPLE DOESN'T UNDERSTAND THEY'RE AFTER THEIR MONEY. GET THE HELL OUT. Either inflation, or confiscation, get the hell out. NOW! Dumb people. Dumb, dumb people.

Thu, 10/24/2013 - 23:06 | 4088483 Pinto Currency
Pinto Currency's picture

The Fed loves speculation in equities but sees gold and silver price appreciation as risks.

That tells us how the paper pushers at UBS view gold and silver.

UBS is one of the market makers at the LBMA so they should know of the risk of a rising gold price.

http://www.lbma.org.uk/pages/index.cfm?page_id=62&title=market-making_members

Thu, 10/24/2013 - 23:17 | 4089050 markmotive
markmotive's picture

Mike Maloney understands gold and he thinks could head to $5000+

http://www.planbeconomics.com/2013/09/mike-maloney-2000-or-5000-gold-is....

Fri, 10/25/2013 - 06:04 | 4089411 tocointhephrase
tocointhephrase's picture

Try $47,000 (Hidden Secrets of Money). I thought that was you Ba Ba Bouy when he said it?

Thu, 10/24/2013 - 20:14 | 4088538 Nothing but the...
Nothing but the truth.'s picture

UBS must be fucking dozing if they have only now spotted problems with the US fiscal situation - and they must be one of very few who are " surprised" by golds strength . Bunch of fuckheads.

Thu, 10/24/2013 - 20:41 | 4088616 Urban Redneck
Urban Redneck's picture

Something is wrong in the Farce.

UBS is hiring powerpoint rangers

And they're asking about "velocity of capital" - see Singh (IMF) or telephone (212) 270-6000 if you need data ASAP.

Thu, 10/24/2013 - 19:32 | 4088402 Fredo Corleone
Fredo Corleone's picture

Figure 15 resembles one of Bill Banzai's flowcharts.

Thu, 10/24/2013 - 19:26 | 4088403 cpnscarlet
cpnscarlet's picture

Article will be seen as gold-negative...like every other piece of news.

And China will buy more.

And lest we forget, in July, Jim Sinclair said the COMEX would have to change their delivery system/agreements by now. Nope...they're still in business delivering something. Santa's becoming as reliable as Turk the Jerk.

Thu, 10/24/2013 - 19:35 | 4088454 Bay of Pigs
Bay of Pigs's picture

Still bashing the goldbug vets are we cpn? Some things never change. ;)

Thu, 10/24/2013 - 22:34 | 4088920 cpnscarlet
cpnscarlet's picture

Still?

I've only just started taking Santa to the woodshed lately. Turk on the other hand has been a favorite whipping boy for about a year.

Fri, 10/25/2013 - 04:16 | 4089364 greatbeard
greatbeard's picture

>> taking Santa to the woodshed

In your dreams.  Maybe you can compare your credentials with Sinclairs?

Fri, 10/25/2013 - 09:06 | 4089669 cpnscarlet
cpnscarlet's picture

Not here to compare. Just stating the painfully obvious that he hasn't made one good prediction since before August 2011. I feel sorry for the man, but he's been wrong, wrong, wrong lately.

Sinclair's a "guru" of standing, but if you can't admit that little bit of truth, you are a sicofant cheerleader.

Thu, 10/24/2013 - 19:25 | 4088432 withglee
withglee's picture

"(For ease of writing - I'll refer to money, near money and credit combined as 'credit')."

So as not to deceive yourself, why not refer to money as what it actually is ... "a promise to complete a trade". Viewed through that proper framework, what you write needs another look.

Todd Marshall
Plantersville, TX

Thu, 10/24/2013 - 19:25 | 4088434 koaj
koaj's picture

From my quick scan of this piece it seems that UBS never discusses or even considers that some entity is pushing the price of paper gold down.

 

#blythemasters

Thu, 10/24/2013 - 19:37 | 4088460 Bay of Pigs
Bay of Pigs's picture

Exactly. These assholes are part of the crime syndicate screwing gold investors. I don't believe anything they say.

Thu, 10/24/2013 - 22:27 | 4088909 Silveramada
Silveramada's picture

Indeed, UBS is just an European JPM or HSBC with a German accent... One of the bankster cartel branch on the other side of the pound. 

 

 

Thu, 10/24/2013 - 22:39 | 4088936 JB
JB's picture

how is being able to trade useless FRNs for gold at deeply discounted prices 'screwing gold investors'?

if gold were to be revauled to cover all dollars in existance, it would be something like $50k/oz.

how is getting it at 74% off a bad thing?

Fri, 10/25/2013 - 01:14 | 4089248 Bay of Pigs
Bay of Pigs's picture

Are you a fucking retard? How do you put one before the other?

Thu, 10/24/2013 - 19:41 | 4088470 Sufiy
Sufiy's picture


Western Central Banks Suppressing Price of Gold As China Preparing for the Demise of the Dollar


We continue to investigate the recent manipulations in Gold market and building piece by piece our big picture with the ongoing groundbreaking geopolitical  processes. Bill Murthy from GATA and Alasdar Macleod are sharing their deep knowledge of the Gold market and industry with us today. http://sufiy.blogspot.co.uk/2013/10/western-central-banks-suppressing-price.html#
Eric Sprott's Open Letter To The World Gold Council GLD, MUX, TNR.v, GDX

Thu, 10/24/2013 - 21:25 | 4088725 Kirk2NCC1701
Kirk2NCC1701's picture

The fly in the ointment = why the Western CBs (The Fed!) would want to help China dethrone them.

Aside from it being perhaps an Inside Job... e.g. GS is the two-timing traitor, ingratiating itself in China, to become the new dominant player in Asia... now that the Western demographics are all "fucked up" for the next few decades (i.e., too few young supporting too many old).

Maybe it's China doing this?  To buy Western bullion real cheap.  With GS aiding & abetting.

Thu, 10/24/2013 - 19:41 | 4088471 NIHILIST CIPHER
NIHILIST CIPHER's picture

FU  BERNANKE and FU YELLEN.........Tail hedge yes, money yes and really fun to hold in your hands.

Thu, 10/24/2013 - 19:50 | 4088490 Stuck on Zero
Stuck on Zero's picture

Was this submitted from JPM?   All government numbers, such as inflation, are taken at face value by the Author.  It nicely tows the statist prty line.  Nowhere are naked gold shorts noted as market drivers.  Bah.

 

Thu, 10/24/2013 - 20:24 | 4088568 oddjob
oddjob's picture

there was some truth within

And just as the Bretton Woods process was highly reflationary and bullish for all assets, reverse Bretton Woods is considered bearish for everything, except gold and silver

Thu, 10/24/2013 - 19:59 | 4088512 Life of Illusion
Life of Illusion's picture

 

In our view it is because they believe in the morality of their actions - that banks that are too big to fail should shed assets or raise equity to the point where it's much harder for them to fail, to prevent a repeat of the financial crisis and the heavy burden on taxpayers that ensued.

FED had chance to follow that policy back in 2008-09 reset for growth, to late now. Fed will continue to buy the toxic and destroy the dollar.

here's 70 co as a start.

http://www.federalreserve.gov/newsevents/press/bcreg/20130816a.htm

 

Thu, 10/24/2013 - 20:09 | 4088534 alfbell
alfbell's picture

 

 

This is what Dent has to say about gold. Could he be right? Or even half-right?

HARRY DENT GOLD PROJECTIONS  Wednesday, October 23, 2013
Why Gold Has Lost Its Luster: ?Sell on Rallies Ahead ?Gold was supposed to be the crisis and inflation hedge.
The ultimate protection for investors during bad times.
And it was those things in the 1970s when inflation went to heights not seen in centuries.
But gold is also supposed to go up as more countries print more money and debase their currencies.
That we haven't seen this time around...
The U.S. upped the ante in mid- to late 2012 with its third quantitative easing program – QE3 – followed immediately by QE3 extended.
Then Japan unleashed the greatest QE yet... 2.5 times what we did, when you adjust for the size of its economy.
And China has been off the charts in its easing efforts and debt creation in 2013 as well.
But…
Inflation rates have fallen from 2% to near 1% in the U.S. They continue to be closer to 1% in Europe with its recessionary economy. Only in Japan is inflation rising a little after the strongest peace-time money printing ever.
And gold fell accordingly.
So what gives here?
I believe what gives is that the markets have finally grasped the truth in our long-time arguments that gold was in a bubble and that all the money printing, stimulus and quantitative easing around the world would not result in high or even hyper-inflation.
Why not?
Because private debt, which is much larger than public debt, keeps deleveraging in most countries, albeit not as fast as it would without this unprecedented stimulus and money printing.
And debt deleveraging causes deflation, not inflation, as history proves clearly.
Major deflation periods followed major debt and financial bubbles after they peaked in 1835, 1873, 1929… and again in 2007.
If governments are printing money to fight debt deleveraging and deflation – which is exactly what they're doing – then that is the trend… and gold is an inflation hedge, not a deflation hedge.
That is why gold has been falling for most of 2013.
The chart below shows how gold peaked in September of 2011 at $1,934 and then went into a long trading range between $1,525 and $1,800. Normally such a massive rise and such a trading range would suggest a final break to new highs before peaking. But that didn't happen. Instead gold fell below $1,525 and then crashed to $1,179 into late June.

The truth is that gold has been mortally wounded.
Do you remember how oil went up to $147 in 2008 and then collapsed down to $32 in just four months? That was thanks to highly-leveraged hedge funds and financial institutions speculating on the price of oil and then suddenly having to meet margin calls when the music stopped.
Now, the same thing is happening to gold, only to a lesser degree.
Many funds had to sell to meet margin calls between April and June 2013. Even after that wash out, every time gold rallies, it falls back again as more funds and investors cover their losses and leveraged bets.
So where to next for gold?
The next strong support in gold doesn't come until around $700 or $740. The ultimate support is around $250 per ounce, the 1998 to 2000 lows before the bubble began.
In this long period of off-an-on-again deflation, gold will just get weaker and weaker. It may go up in the anticipation of a financial crisis in 2014, just like it did into June 2008. But when the crisis actually hits, debt starts deleveraging and deflation sets in (again like in late 2008), gold will continue its painful meltdown.
Since gold has become oversold and I see another financial crisis building, my advice is simple: Sell what gold you have left on significant rallies ahead, especially into early 2014.
We'll look to better gauge that in our Boom & Bust newsletter, where we focus more on identifying major reversals in key markets to help you protect your assets and allow you to prosper, even in bad times.

Fri, 10/25/2013 - 00:55 | 4089231 buyingsterling
buyingsterling's picture

The feds ignore energy and allocate 1% of income to health care, and they don't consider the standard of living when calculating inflation: if you used to buy steak but now slaughter your own goats, it's inflation neutral. By the Austrian measure - supply of money - inflastion has never been more rampant.

So all of the prerequisites for a steadly increasing gold price are in place, but so is a cash settlement paper market. Gee, I wonder why the price isn't rising steaily.

 

Thu, 10/24/2013 - 20:25 | 4088571 MrVincent
MrVincent's picture

I just had a chart attack!

Thu, 10/24/2013 - 20:52 | 4088649 hooligan2009
hooligan2009's picture

it is always good to hear the message from the "other side" but i think we all know by now that the value created by economists anywhere, let alone by banks whose interest is in causing volatility that they can capitalize on is getting just a tad ludicrous...the ubs economics team is at best a flag waver for the conventional economic theories that have caused nations to go bust and at worst a hawker of its own "solutions" that result in the creation of more and more fiat currency in the form of fiat profits that supposedly lead to nice fat fiat risk adjusted reserves.

this is akin to a central banker saying he will do whatever it takes to protect his job. what else would he do? less than whatever it takes? what would a bank, recommend the right answer?

we know the right answer, it is not based in fiat currency experiments and the continuation of a financial system that has already failed. 

the answer lies in only making promises that you can keep and by not borrowing what you cannot afford to pay back.

we will have solutions when countries run fiscal surpluses of a size and a rate that will reasonably not only reduce debt, but produce assets that in turn produce income that removes the need for taxes. that is a legitimate goal for a government and removes the "tax and spend" mentality that inexorably bankrupts nations.

opinions from bankers or central bank economists or fiat based market practitioners are worth as much as fiat paper...nothing, they create no value for anyone beyond what a bunch of chimps in a locked room full of one red button out of ten blue buttons might produce for behavioral scientists....nothing of any value to anyone.

companies that produce goods that make people better off are desirable...companies that reduce peoples standards of living (like banks) should fail. the central banks experiment is not an experiment, they have been panicked into acting as lenders of last resort to perpetuate their own brand of politics (the banking sector must be supported at the expense of allother sectors and at all costs so they can continue to rip people off and pay a small slice in corporate taxes and income taxes on fat salaries).

hands up who voted for an increase of $50,000 for every man woman and child to bail out banks over the last five years against how many voted to receive welfare benefits of $50,000 over the last five years versus how many actually voted to get honesty and integrity for all? the mobocrats brawling on the lawn and the kitchen of the white house are enacting policies that put the nation into debt without getting any votes from anyone with honesty and integrity...

bank views.....bleh...bring back the independent thinkers like reggie middleton for a bit of balance...where is he anyway?

Thu, 10/24/2013 - 21:32 | 4088758 alfbell
alfbell's picture

 

 

This is what Dent has to say about gold. Could he be right? Or even half-right?

HARRY DENT GOLD PROJECTIONS  Wednesday, October 23, 2013
Why Gold Has Lost Its Luster: ?Sell on Rallies Ahead ?Gold was supposed to be the crisis and inflation hedge.
The ultimate protection for investors during bad times.
And it was those things in the 1970s when inflation went to heights not seen in centuries.
But gold is also supposed to go up as more countries print more money and debase their currencies.
That we haven't seen this time around...
The U.S. upped the ante in mid- to late 2012 with its third quantitative easing program – QE3 – followed immediately by QE3 extended.
Then Japan unleashed the greatest QE yet... 2.5 times what we did, when you adjust for the size of its economy.
And China has been off the charts in its easing efforts and debt creation in 2013 as well.
But…
Inflation rates have fallen from 2% to near 1% in the U.S. They continue to be closer to 1% in Europe with its recessionary economy. Only in Japan is inflation rising a little after the strongest peace-time money printing ever.
And gold fell accordingly.
So what gives here?
I believe what gives is that the markets have finally grasped the truth in our long-time arguments that gold was in a bubble and that all the money printing, stimulus and quantitative easing around the world would not result in high or even hyper-inflation.
Why not?
Because private debt, which is much larger than public debt, keeps deleveraging in most countries, albeit not as fast as it would without this unprecedented stimulus and money printing.
And debt deleveraging causes deflation, not inflation, as history proves clearly.
Major deflation periods followed major debt and financial bubbles after they peaked in 1835, 1873, 1929… and again in 2007.
If governments are printing money to fight debt deleveraging and deflation – which is exactly what they're doing – then that is the trend… and gold is an inflation hedge, not a deflation hedge.
That is why gold has been falling for most of 2013.
The chart below shows how gold peaked in September of 2011 at $1,934 and then went into a long trading range between $1,525 and $1,800. Normally such a massive rise and such a trading range would suggest a final break to new highs before peaking. But that didn't happen. Instead gold fell below $1,525 and then crashed to $1,179 into late June.

The truth is that gold has been mortally wounded.
Do you remember how oil went up to $147 in 2008 and then collapsed down to $32 in just four months? That was thanks to highly-leveraged hedge funds and financial institutions speculating on the price of oil and then suddenly having to meet margin calls when the music stopped.
Now, the same thing is happening to gold, only to a lesser degree.
Many funds had to sell to meet margin calls between April and June 2013. Even after that wash out, every time gold rallies, it falls back again as more funds and investors cover their losses and leveraged bets.
So where to next for gold?
The next strong support in gold doesn't come until around $700 or $740. The ultimate support is around $250 per ounce, the 1998 to 2000 lows before the bubble began.
In this long period of off-an-on-again deflation, gold will just get weaker and weaker. It may go up in the anticipation of a financial crisis in 2014, just like it did into June 2008. But when the crisis actually hits, debt starts deleveraging and deflation sets in (again like in late 2008), gold will continue its painful meltdown.
Since gold has become oversold and I see another financial crisis building, my advice is simple: Sell what gold you have left on significant rallies ahead, especially into early 2014.
We'll look to better gauge that in our Boom & Bust newsletter, where we focus more on identifying major reversals in key markets to help you protect your assets and allow you to prosper, even in bad times.

Thu, 10/24/2013 - 21:52 | 4088805 eddiebe
eddiebe's picture

See, what you do is take something very simple and make it as complicated as possible.

Fri, 10/25/2013 - 00:18 | 4089187 e_goldstein
e_goldstein's picture

I think you just summed up the entire FIRE economy.

Thu, 10/24/2013 - 22:40 | 4088945 rustymason
rustymason's picture

What does the price really mean if it is in fact manipulated? Is a commodity that can be manipulated really a safe haven? Hard to get a straight answer to that.

And nothing against gold, but I see a whole lot of people dumping their precious metals in trade for more precious metals such as lead and beans when the zombie apocalypse comes.

Thu, 10/24/2013 - 23:37 | 4089115 dtwn
dtwn's picture

I for one actually liked the analysis.  Fairly thorough.  And refreshing to actually see a major bank mention Austrian economics and Hayek.  Although both Mises and Rothbard should get a shout out as well.

Thu, 10/24/2013 - 23:50 | 4089144 Xploregon
Xploregon's picture

I really miss the good 'ole days when a long drawn-out tome ended succinctly clear with a paragraph starting with..."In summary...".

You know...for the average guy.

 

Fri, 10/25/2013 - 02:29 | 4089316 jonjon831983
jonjon831983's picture

"GATA hero Maguire is no metals trading expert—CPM’s Christian"

http://www.mineweb.com/mineweb/content/en/mineweb-gold-news?oid=210106&sn=Detail

 

"During an interview Thursday at the Silver Summit, Murphy told Kitco News that he did not research Maguire’s background after Maguire contacted GATA Director Adrian Douglas in March 2010 with alleged evidence that the silver market was being manipulated."

"Christian’s research was prompted by Maguire’s ex-wife, who contacted Christian after seeing the CBC documentary, “The Secret World of Gold,” which featured Maguire being presented as an experienced metals trader.

However, follow-up research by Christian revealed Andrew Thomas Maguire formerly worked as a car salesman and a car leasing agent in the UK, immigrated to Canada and started a vehicle leasing company, and eventually got into day trading."

Fri, 10/25/2013 - 03:21 | 4089347 JPMorgan
JPMorgan's picture

He probably washed cars when he was an nipper as well. 

Anyone that listens to Andrew Maguires's interviews will soon come to realise he knows what he is talking about.

The ex-wife probably has a axe to grind (most do). 

 

Fri, 10/25/2013 - 02:30 | 4089318 Debugas
Debugas's picture

to put it short - the guy who prints money does not want the confidence in his money to erode. Gold is an alternative to move to when you lose your confidence in that fiat printing guy

Fri, 10/25/2013 - 02:52 | 4089329 JPMorgan
JPMorgan's picture

'nobody really understands gold prices and I don’t pretend to understand them either'.

B U L L S H I T

He knows exactly why the gold price acts the way it does. That was a complete dodge just like his 'tradition' answer was on gold.

Fri, 10/25/2013 - 06:20 | 4089412 Tic tock
Tic tock's picture

Author, in between some surprisingly careful language, seems concerned over the future 'cost of credit', albeit, possibly for a subset of reasons for which may be fully germane to the issue. Imagine that the economy is bifurcated, that large companies have access to an excessively liquid pool of 0% credit, and small businesses face, say, 15% credit. While large companies provide 'strategic' inputs to the economy, small businesses allocate scarce capital efficiently. Consumers, incidentally, suffer 20% credit. The aim of recently-proposed legislation is probably an attempt to affect the excessive liquidity at the 0% level, rather than to lower the cost of credit otherwise.

Yield, in terms of the majority of financial instruments, is based on the efficiency of the large companies, who in turn rely on small businesses to perform adequately. Currently, large companies do not actually require 0% credit, instead it is more likely that it is the small businesses who may require 3% credit. What the article does mention, is that international currency-flows are relevant to 0%-level credit expansion, while domestic flows are not - even if the underlying trade is similar in both cases, essentially being the same set of goods - because of the central Bank wealth effect, feeding into Government-spending...what is Key here, is that the 0% credit is generated by economic activity by large-companies working under government contracts, rather than any internal-disposable income multplier. 

There are two major concerns in global finance, currently. The ability for infrastructure and capacity of basic-inputs, to return Yield. And the massive pool of dollars which have nowhere to go: one sits on top of the other. Both sit atop a financially-insecure consumer and small-business base.

New York is simply not geared to handle consumer and small-business finance, in this respect there is nothing here that NYFED and similar institutions may do in regards the actual problem. Instead they would, in theory, be constrained to preserving the value of attendant balance-sheets in a declining-demand-for-credit environment. What may be instead helpful is the instigation of a broad range of structural measures to improve the, effectively, cash-position of individuals, but without a further spending committment  - because actual provision will likely result in expectations related to a future-negative tax. 

The single greatest obstacle to fixing this problem, and in terms of credit-flows and liquidity, we are actually in uncharted terriatory, is that, as businesses, Banks would, for their shareholders, find ways to steal the money held by non-lobbying entities, like consumers and small-businesses. This has pretty much been consistently demonstrated. Secondly, that Yield is being sought from consumers' income; their role is to provide economc activity, it is only small-businesses who should be providing yield (to the large companies) - and the only way - that i can think of - to achieve that is properly manage the monopolistic tendencies of the strategic industries; which is essentially the same as suggesting the taking away of their profit-motive.

 

 

Fri, 10/25/2013 - 11:10 | 4089786 withglee
withglee's picture

You need to rewrite your comment keeping two things in mind: (1) Money is "a promise to complete a trade". (2) Credit is the marketplace's cost of "guaranteeing a trader's promise". For responsible traders, the cost of the guarantee is zero. Most corporations are responsible traders but when they fail the stakes are huge. Small businesses have large failure rates, thus actuarially they are (as a group) less responsible traders. But the key is, like any group, there are good and bad actors. The challenge is to detect the bad actors and impose higher INTEREST collections on them to reclaim money left circulating when someone in their group DEFAULTS.

With a method of properly measuring trader responsibility we have a natural negative feedback control. Irresponsible traders just can't compete and are filtered out. It's very similar to what the underwriting department of an insurance company does ... try to know the risk and charge accordingly.

And the last and most important thing to observe: Governments are the most irresponsible traders of all. They never keep their trading promises ... they just roll them over (which is DEFAULT). And worse, they enjoy the cheapest credit of all. Fix that one problem and you've gone a long way towards fixing all the problems. A natural and enticing effect is that all governments would be much smaller, doing just what their taxpayers (and not the democratic mob) want done.

Todd Marshall
Plantersville, TX

Fri, 10/25/2013 - 09:10 | 4089676 natty light
natty light's picture

Growth and valuation of stock market dependent on QE.

Market increase in yield; market forces Fed to increase rate of purchases.

Monetary bubble continues expanding.

Economic system crashes.

FIFY

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